Question

Question 1:

Al Omani (SAOG) one of the large manufacturing company based in Sohar, has made all the arrangements in the beginning of the year 2017, to give a bulk purchase order to their major supplier Khalid Traders a Partnership firm based in Mucat, in order to start the production in their new factory.

On 10th January 2017 Al Omani company purchased (goods for credit) materials worth OR.200,000 from

Khalid Traders .But Al Omani company agreed to pay the full amount only after 2 months ie,on 11th March 2017.

From the above scenario, you need to consider the following Two situations.

Situation-1

You are currently doing your OJT(On the job Training) in Khalid Traders accounts department, towards the end of training the head of accounts has asked you to answer the following.

Note: Khalid Traders is following Accrual basis of accounting,

a) At what date Khalid Traders need to identify and record the above transaction in the books of accounts, also discuss briefly about how Accrual basis of accounting is used for revenue recognition.

(2.5 marks Word Limit 50-80)

b) Do you think, the credit sale transaction of Khalid Traders initially leads to increase the account receivable of the business? Yes/No justify your answer.

(1 mark Word Limit 20-40)

c) Would you consider Khalid Traders partnership firm’s liability is limited? Yes/No Justify on your answer. Also discuss briefly any two advantages, if Jamal Traders change their partnership firm structure to LLC.

(1.5 marks Word Limit 40-70)

(Total 10 Marks)

Situation-1

You are recently joined in Al Omani (SAOG) Company as a junior account clerk, and the accounts manager has asked you to do the following tasks.

Note: Al Omani Company is following accrual basis of accounting.

a) At what date you need to identify and record the above transaction in the books of accounts, also discuss briefly about how accrual basis of accounting system is used for recording the above transaction.

(2.5 marks Word Limit 50-80)

b) Do you think, the credit purchase transaction initially leads to increase the account payable of the business? Yes/No comment briefly on your answer. (1 marks Word Limit 20-40)

c) Identify and discuss briefly about the source document, you need to refer before identifying and recording the above credit purchase transaction in the books of accounts.

(1.5 marks Word Limit 40-70)

Answer 1

Situation-1

You are currently doing your OJT(On the job Training) in Khalid Traders accounts department, towards the end of training the head of accounts:

a. Khalid traders will identify and record above transaction on 10th january, 2017 in there books of accounts. Accrual basis of accounting requires that all revenues and expenditure will be recorded in the period in which they accrue i.e., cash received and paid for same is irrelevant. So, in our case we will recognise revenue on 10th januray, 2017 and not wait for Al omani to pay cash to recognise revenue.

b. Yes, credit sales transaction will increase account receivable of khalid traders by OR 200,000. Reason is simple that cash will be received after 2 months, so for the time being our debtors will increase.  

c. No, khalid traders partnership firm does not have limited liability as it is not limited liability partnership.

Advantages of limited liability company (LLC):

- There can be unlimited number of members in LLC.

- Owners are not personally responsible for business debts and liabilities.

Situation-2

You are recently joined in Al Omani (SAOG) Company as a junior account clerk, and the accounts manager has asked you to do the following tasks:

a. Al omani will identify and record the above transaction on 10th january, 2017 in it's books of accounts. Accrual basis of accounting requires that all revenues and expenditure will be recorded in the period in which they accrue i.e., cash received and paid for same is irrelevant. So, in our case payment will be made after 2 months in march but transaction will be recorded in books on 10th january, 2017.   

b. Yes, credit purchase transaction initially increase the account payable of the business. As creditors are paid after 2 months, so we will increase account payable by OR 200,000 in our books of accounts.

c. Source document will be the sale invoice provided by khalid traders. Based on this sales invoice we will recognise purchases in our books of accounts and increase the corresponding creditors in our books of accounts by OR 200,000. This document will provide details about quantity, amount, date, tax rate, invoice number, etc.